National Third Party Access Code for Natural Gas Pipeline Systems
Notice pursuant to section 2.9

Additional Access Arrangement Information required from AGLP

Category 2

“An explanation of AGLP’s understanding of “economic depreciation” as it applies to the proposal, and how the concept has been used.  How is a DORC valuation of $28.54 million derived from an ORC valuation of $24.98 million?  How is a DORC valuation of $45.12 million in 2004 (the Fixed Principle) derived?  Numerical calculations as well as narrative are needed.”

The meaning AGLP has attached to economic depreciation as applied in the CWP Access Arrangement is that it (economic depreciation) is the amount remaining (positive or negative) after operating costs and return on capital have been subtracted from the total revenue.  The amount of economic depreciation so determined is then deducted from the capital base each year with the result that the capital base will change over the life of the assets to reflect the extent to which total revenue has covered both operating costs and return on capital.  In calculating economic depreciation no other form of depreciation (eg straight line or accelerated) is taken into account.

The CWP is a “green field” development which requires the adoption of tariffs that will develop the market for its services.  Therefore it will be some considerable time into the future before the CWP will generate sufficient revenue to cover both operating costs and the return on capital.  We have applied economic depreciation to ensure that at the end of the Access Arrangement Period the extent to which under-recovery has occurred during this time will be reflected in the residual value of the CWP.

The adjusted ORC valuation of $24.98m is further adjusted to arrive at a DORC valuation of $28.54m by applying the above principles of economic depreciation in the year prior to year one of the Access Arrangement.  The difference of $3.56m reflects $3.54m of economic depreciation (ie un-recovered operating costs and return on capital) in the first year of operation.  To be clear, it is the economic depreciation that has been applied to the ORC to arrive at the DORC as at 30 June 1999, and each subsequent year of the Access Arrangement  to arrive at the economic depreciated DORC valuation of $45.12 million in 2004.

The 2004 valuation (of $45.12 million) is the same whether determined by applying these economic depreciation principles to successive years out to 2004, or from determining the residual value from an NPV analysis of the project cash flows from 2004 onwards.

Attached is an annotated copy of a simple pre-tax real cash flow model of the CWP (together with an electronic copy) which we trust will assist you in further understanding AGLP’s application of economic depreciation.

“What is the value of accumulated depreciation?  CWP is a new pipeline.  However, as at the asset valuation date of 30 June 1999 the asset life is less than maximum.  This implies there should be some accumulated depreciation, yet no figure is supplied.  How much is it and how has it been derived.  Again, numerical calculations as well as narrative are needed.  The annual depreciation for each year of the access arrangement period should be provided.”

The (economic) depreciation expected for each year of the Access Arrangement Period is set out in the table below.  The figures are in dollars of the day and are all negative (ie asset value is increasing) due to the expected under-recovery of operating costs and return on capital during this period.

	1999	2000	2001	2002	2003	2004	
Depreciation ($m)	(3.54)	(3.51)	(3.39)	(3.17)	(2.81)	(2.70)	

In the table of “Optimised Pipeline and Replacement Costs” in section 3.1.2 of the RAAI all the accumulated depreciation for the total asset has been accrued to the pipeline component of the DORC, rather than to the other components making up the total asset value (ie regulation and metering stations, odourisation stations and SCADA and communications).  It was felt that since these other components make up only a very small proportion of the total CWP value and that accumulated depreciation will increase their value, it was appropriate to hold their value constant and have all depreciation accrue to the major component of the asset (ie the pipeline).

“A total figure per year should be provided for the capital investment mentioned in the access arrangement information.”

This information is contained in section 3.1.8 of the RAAI.

“The various CAPM formulae used by AGLP should be explicitly expressed (note the discussion in the ACCC Final Decision on the Victorian transmission access arrangements of various possibilities and the Commission’s preferences).  What are the benchmark rates of return, the commercial judgement and the considerations required by the Code which have lead AGLP to assume a pre-tax real WACC of 10.0%?  Some narrative is needed to indicate how this figure was developed from the figures produced by the CAPM model using the parameters supplied.”

“Forecast equity returns and debt costs for each year of the access arrangement period should be provided.”

This information is contained in section 3.2.3 of the RAAI.

Category 3

“Quantify the total forecast Operations and Maintenance expenditure per year.  The access arrangement information implies that all O&M costs are included in the contract with EAPO.  If this is so it should be stated clearly.  If it is not so, O&M costs not included in the contract should be listed separately, using the categories in Attachment A to the Code.  Is the variance between forecast and actual costs (associated with the contract with EAPO) borne by AGLP or EAPO?”

This information together with further explanation is provided in sections 4.1 of the RAAI.

Category 4

“Quantify the total forecast Overheads & Marketing Costs per year and disaggregate between the cost of corporate services provided to AGLP and other costs.  The basis for the calculation of the cost of corporate services provided to AGLP should be explained.”

This information together with further explanation is provided in section 4.2 of the RAAI.

Category 5

“What is the average daily and peak forecast demand for each year for each off-take point?”

The information in respect of “city gates” is provided in section 5.3 of the RAAI.

Category 6

“Specify the actual operating cost KPI ($m/1000km) derived from the forecasts used in the Access Arrangement.”

The information is provided in section 6.4.1.6 of the RAAI.